Why are Credit Cards Good for Building Credit?
A credit card allows an individual to borrow money from a bank or financial institution up to a certain limit. This borrowed money, known as credit, can be used to make purchases and payments for goods and services. Credit cards have become an integral part of our daily lives. But, you might be wondering- Are credit cards a good or bad way to build your credit?
Credit cards are not only convenient for making purchases, but they also provide individuals with an opportunity to build credit. By responsibly using a credit card, individuals can establish a positive credit history, which is crucial for obtaining future loans and financing. Payment history makes up around 35% of how your credit score is calculated. If you use your credit card and consistently pay it off, that can build a positive credit history. Basically, that shows the credit bureaus that you are capable of handling your debt and keeping your credit utilization low.
In this article, we can explore more about how credit cards can be good or bad for building credit. Keep reading to learn more about credit cards!
Does Using a Credit Card Build Credit Faster?
Yes, using a credit card (or multiple cards) and consistently paying off your balance can help you build credit faster than other methods. However, it is important to keep in mind that if you do not pay off your balance in a timely manner, that could hurt your credit score.
What are the Benefits of Using Credit Cards to Build a Credit History?
If you have been avoiding getting or using credit cards because you’ve always thought they’re bad, you should know that credit cards, when used properly, can be a useful personal financial tool. Here are some advantages of credit cards:
- Build your Credit History.
Credit cards are an excellent way to establish your credit history, which is a vital step in building a decent credit score. Credit cards, in essence, are a tool for determining how good you are at managing your finances. As a result, they demonstrate whether you are dependable and consistent as a borrower.
- Rewards & Perks.
Many credit cards have reward programs that allow you to earn points, cash back, or airline miles for every dollar spent.
These rewards can be accumulated over time and redeemed for travel, gift cards, or statement credits. Furthermore, some credit cards provide bonuses such as trip insurance, extended warranties, or purchase protection, giving you more value for your money.
- Credit Cards are a Convenient Payment Method.
Credit cards make it simple and handy to pay for items. Most stores accept credit cards. Plus, you can also use them to make purchases on the internet, and it can be safer than using your debit card.
- Extra Money for Emergencies.
If you ever find yourself in a situation where you need money quickly but don’t have it, a credit card can come in handy. It can be used for car repairs, medical bills, and almost anything else that unexpectedly arises.
- Don’t Have to Carry Cash.
More than cash, credit cards are typically more convenient, and they take up less room in a wallet than a bunch of dollars. Credit cards are great forms of consumer spending tools because they are generally accepted in most retail and businesses worldwide.
You can keep them in your pocket, ready to be used whenever you need them. If your card goes missing or is stolen, your issuer can simply mail you a replacement. That is not the case with cash.
What are the Downsides of a Credit Card?
Credit cards aren’t only about incentives and sign-up bonuses. They are significant financial tools that, if abused, can lead to debt and financial instability. It is critical to understand the negative aspects of credit cards. Here are some of the downsides of credit cards:
- You May Overspend.
One of the most serious downsides of credit cards is the desire to overspend. The availability of credit can make it easy to fall into the trap of purchasing items that you cannot afford, resulting in debt accumulation and financial hardship. It’s important to practice self-control and charge just what you can comfortably pay off in full each month.
- Potential for Debt Accumulation.
It’s essential to develop a budget, keep track of your spending, and use your credit card as a financial tool rather than a source of extra revenue. If you carry high balances on your credit cards, that will not build your credit score. In fact, it can cause your score to take a nosedive!
So, are credit cards good or bad for credit?
While the best answer to this question is yes, it is important to note that the good or bad of credit cards for credit ultimately depends on how they are used.
If you are responsible, make timely payments, and keep your balances low, credit cards can be a valuable tool for building credit and reaping rewards. Conversely, if misused, it can result in credit card debt and a poor credit score.
How to use credit cards responsibly
Here are some guidelines for using credit cards responsibly:
- Keep track of your spending.
Losing track of your credit card purchases can lead you to be buried under a pile of debt. As a result, tracking your expenses will help you pay off your debts on time and prevent making poor financial decisions.
- Aim to pay off your balance in full every month.
Every month, make sure to pay off your credit card bill in full. Carrying a balance over for months will only result in your balance increasing as interest accumulates.
- Make payments on time.
Make sure that you pay your balance on the due date each month. If you are in a situation where you can’t pay the money on the due date, pay at least the minimum payment due to avoid late fees.
Don’t fall into the temptation of spending more than you should or more than you can pay for the month. To ensure on-time payments, set up automatic payments or reminders to help you stay on track.
- Limit expensive purchases.
It’s a good idea not to make purchases you can’t afford. Be realistic about your budget for non-essential items such as eating out, traveling, or purchasing a new television.
- Stay below your credit card limit.
Your credit utilization ratio, which is how much credit you use compared to your total overall available credit, should never be more than 30%. Don’t go above your budget.
Use Credit Cards Correctly to Build Your Credit
Credit cards, when used correctly, can help you improve your money management skills, establish a stronger credit score, and win more trust from the financial organizations that issue lines of credit. If you’re looking to get a credit card, Max CashⓇ has your back! We’ve partnered with a few different providers to give you plenty of options. This includes a secured credit card! Click here to learn more.5
